China has agreed to switch away from using US dollars to pay for Russian gas delivered via the Sila Sibiri trunkline as the Kremlin continues to build closer commercial relations with Asian customers to help cope with the impact of Western sanctions introduced after Russia’s invasion of Ukraine.
In a statement, Russian gas giant Gazprom said state-owned China National Petroleum Corporation (CNPC) had signed an update to a 2014 long-term gas supply agreement, opening the way for CNPC to use a mix of Chinese yuan and Russian rubles as payment currencies.
The agreement calls for Gazprom to increase its gas shipments via Sila Sibiri to a maximum of 38 billion cubic metres per year by the end of 2025.
Speaking at the Eastern Economic Forum in Vladivostok, in Russia’s far east on Wednesday, Russian President Vladimir Putin gave details to the new payment arrangement, saying that CNPC will pay on the basis of 50:50 split between yuan and ruble.
Gazprom and CNPC have yet to flesh out the details on how the Chinese company will receive rubles that it will be required to make payments.
Earlier this year, some European customers of Gazprom accepted a scheme under which they send US dollars and euros to a designated account with Gazprombank in Moscow for conversion into the rubles that are then wired to the gas giant.
Mikhail Krutikhin, a partner in Moscow-based energy consultancy RusEnergy, questioned whether the volume of Russian pipeline gas deliveries to China is significant enough to make the agreed switch effective enough to break free of values expressed in US dollars and calculated by reference to global exchange rates.
Gazprom said in its most recent annual report that it delivered 10.4 Bcm of gas via Sila Sibiri to China in 2021.
Supply boost
The Russian gas giant also said on Wednesday that it is expecting to boost gas deliveries to China via Sila Sibiri, planning to complete an 800-kilometre pipeline connector between the Chayanda and Kovykta gas fields by end of this year.
At present, Gazprom can only transport gas to CNPC from the Chayanda field in East Siberia and needs to connect the Kovykta field in order to sustain the production plateau over the long term.
A key unfinished element in a plan to boost supplies via Sila Sibiri is the Amur gas plant, currently under construction near the China-Russia border.
Gazprom said last week that a third processing train, out of six planned at the facility, is set to come onstream before end of this year.
The plant will take incoming gas mixture from the Chayanda and Kovykta fields to remove off-spec content from gas before it crosses the Chinese border.
Russian gas pipeline projects
Gazprom has also moved forward with two other pipeline projects that are aimed to increase gas supplies to China in the long-term.
The company said that it started design works on a pipeline that will carry 10 Bcm of gas per annum from Sakhalin Island to Vladivostok for onward transmission to northeast China.
Meanwhile, Mongolia’s Prime Minister Luvsannamsrain Oyun-Erdene stated in Vladivostok on Wednesday preparations to start construction works on a third Russian gas transit pipeline to China “are moving forward according to schedule”.
The proposed pipeline will be extended from Gazprom’s existing gas assets in West Siberia and will cross Mongolia on its way to China.
This trunkline may deliver up to 50 Bcm of gas to China, though Gazprom has yet to sign any binding agreement on such deliveries with CNPC.
Diversion to Asia
Russia has repeatedly said it will boost efforts to divert gas flows from Europe to Asia after the imposition of Western sanctions, followed by an initiative to place price caps on Russian oil and gas exports.
However, when three pipelines become operational, they will still provide an outlet for about 98 Bcm of Russian gas, compared with the 148 Bcm that Gazprom delivered to European countries in the pre-Covid year of 2019.
Putin told his Vladivostok audience that proposals by the G7 group of developed economies to introduce price caps on Russian oil, and European Union moves to do the same with gas exports, may lead to a decision to halt all sales of natural gas, oil products, fuel oil and coal to countries supporting such measures.
Putin has repeatedly blamed Western governments for creating the gas supply crisis by first relying increasingly on spot market supplies, diminishing the role of long-term contracts, and then breaking economic ties with Russia.
Putin denied weaponising natural gas, saying that Gazprom honours all long-term supply deals with its customers.
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